ICAEW finds slow progress on improving audit quality

The quality of auditing of non-public interest entities (PIEs) is failing to improve, according to the ICAEW Regulatory Board (IRB) annual audit monitoring report, which highlights the need for greater auditor scepticism and robust challenge of management

In 2019, ICAEW reviewed 960 audit files across a wide range of firms, from the Big Four to sole practitioners.

Of these,  18% required improvements and 8% needed significant improvement, in line with the findings of the previous two years.

The latest report stated: ‘The picture is virtually static. While audit quality continues to be acceptable or better on a good majority of the audits reviewed, it’s disappointing that around a quarter of audits are still not as good as they should be.’

Audits typically needed to improve because they lacked sufficient evidence, reached inappropriate decisions in key areas, failed to challenge management, and/or lacked adequate documentation. In all cases where quality needed to improve, robust action plans were agreed with firms, and progress was monitored.

The report highlighted that given the uncertainties stemming from Brexit, and now the coronavirus pandemic, going concern is more likely to be a significant risk for many businesses. The review continued to see weaknesses in testing, insufficient scepticism and challenge of management, and inadequate documentation.

There were also concerns around the level of testing of management forecasting, and around valuations, in particular property valuations.

Overall, the 2019 results found a slight reduction in the most serious cases referred to the independent Audit Registration Committee (ARC) for it to consider taking action. The ARC can impose various sanctions, such as restricting a firm from taking on any new audits, imposing a financial penalty, or removing a firm’s audit registration.

Regular external cold file reviews, and the effective use of root cause analysis, were identified as key tools for driving improvement. The report also highlighted the range of educational resources available to firms, such as the ICAEW training films.

Michael Caplan, chair of ICAEW’s Regulatory Board, said: ‘Trust in the quality of audit underpins confidence in UK business. In the current economic climate this has never been more important.

‘The report shows there is good practice among most audit firms, but it is concerning that around a quarter of audit files reviewed did not meet the high standards ICAEW expects, as the largest audit supervisory body in the country.

‘ICAEW is committed to supporting its regulated firms in achieving a better quality of audit.’

This year, for the first time, ICAEW quality assurance findings were included in an appendix to the Financial Reporting Council Audit Quality Review, which reviews the performance of the six largest firms auditing PIEs. 

Audit Monitoring Report 2020 is here.

By Pat Sweet

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